After Earnings, Is Disney Stock a Buy, a Sell, or Fairly Valued?

Walt Disney DIS released its first-quarter fiscal earnings report on Feb. 5. Here’s Morningstar’s take on Disney’s earnings and stock.

Key Morningstar Metrics for Disney

• Fair Value Estimate: $125.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Walt Disney’s Earnings

Disney’s fiscal first-quarter revenue grew 5% year over year, while operating profit grew 38%. Profit gains were driven by the firm achieving streaming profitability, its strong movie releases, and its strength in sports. Streaming subscriber numbers were roughly flat as the company continued fine-tuning its offering.

Why it matters: Financial success in streaming and strength in other businesses has blunted the impact of the rapidly declining linear networks business, which was once Disney’s cash cow. We don’t forecast significant streaming subscriber growth, but it’s critical that the subscriber base doesn’t erode.

• In the quarter, Disney added 1.6 million Hulu subscribers but lost 700,000 net Disney+ subscribers (including 1.5 million internationally) and 700,000 ESPN+ subscribers. Average revenue per international Disney+ subscriber grew 22% year over year on price increases, so some churn makes sense.
• Entertainment streaming revenue grew 10% year over year on a much larger subscriber base than a year ago and higher prices. Critically, profits continued to grow after first achieving profitability last year. The operating margin was 4.8%, up from 4.4% last quarter and losses last year.

The bottom line: Overall, Disney’s results were very encouraging. We maintain our fair value estimate of $125 per share and believe the firm’s wide moat will lead it to continue posting good results on strength in streaming and experiences, even as linear networks remain in rapid decline.

Big picture: Experiences remain the most important driver of Disney’s value, making up about 60% of operating profit and 40% of revenue, and their outlook continues to improve.

• Despite disruptions due to hurricanes in Florida and the firm realizing preliminary expenses for cruise ships not yet launched, revenue grew 3% year over year during the quarter, and operating income was flat.
• After weakness in the second half of last year, a couple of new cruise ships, and other new experiences opening, growth is set to accelerate.

Fair Value Estimate for Disney

With its 3-star rating, we believe Disney’s stock is fairly valued compared with our long-term fair value estimate of $125 per share. We project entertainment linear networks revenue to decline mid-single digits each year throughout our five-year forecast. We expect growth to be somewhat choppy from year to year, mostly due to advertising revenue. We project a slight annual decline in the affiliate fees Disney receives from pay-TV distributors due to a continuing decline in subscribers to pay-TV services. However, we expect the pace of cord-cutting to slow, and the decline should be largely offset by growth in fees over time.

Read more about Disney’s fair value estimate.

Economic Moat Rating

We are maintaining our wide moat rating for Disney. Ultimately, we believe the firm’s ownership of timeless characters and franchises and its ability to continue creating and attracting top-tier content outweigh its near-term challenges related to the evolving media industry. Although we think it’s likely that the lack of the traditional cable television bundle as a foundation will keep Disney from returning to the level of profitability it routinely achieved in years past, we still expect the firm’s returns on invested capital to comfortably exceed its cost of capital over the next 20 years.

Recent struggles at Disney are related to the shift from the linear television model—wherein nearly all U.S. households subscribed to a pay-TV service offered by distributors like cable and satellite providers—to the direct-to-consumer, or DTC, streaming model. The attraction of Disney’s top-tier networks, led by ESPN, ABC, and the Disney Channel, resulted in this package of channels being included in nearly all subscriptions at industry-leading rates. Relatively high levels of television viewership also boosted advertising revenue. Cord-cutting and a decline in linear viewership have dampened both revenue streams.

Read more about Disney’s economic moat.

Financial Strength

Disney is in sound financial health, even as its debt load and financial leverage are higher than they’ve been historically. The firm ended fiscal 2024 with nearly $40 billion in net debt and a 2.4 net debt/EBITDA ratio. These metrics took only a modest step backward in 2024, despite the firm paying roughly $10 billion to Comcast to cover the floor valuation to buy the remaining one-third stake in Hulu. Though Disney may have to pay a few billion dollars more once the final Hulu valuation is settled, we expect financial leverage to continually improve beginning in fiscal 2025.

Disney stopped paying a dividend in 2020 when the covid-19 pandemic hit and the firm needed to preserve cash. With debt down and its cash flow outlook much improved, Disney reinstituted its dividend in 2024. We believe the dividend will grow and share repurchases will be on the table, especially if the stock meanders at the depressed level that persisted for most of fiscal 2023 and 2024.

Read more about Disney’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Disney is High. The current evolution of the media industry is the main factor behind our assessment. Outside its parks and experiences business, Disney historically had three main sources of revenue: fees it received from pay-TV distributors to carry the Disney bundle of channels, television advertising, and licensing fees for movies and television programming distributed by third parties. All these sources are now under pressure. Cord-cutting and diminished linear television viewership have depressed carriage fees and advertising revenue. Shorter runs in movie theaters and an industry shift toward DTC streaming services have depressed licensing revenue.

Read more about Disney’s risk and uncertainty.

DIS Bulls Say

• No peer can match the depth of Disney’s iconic characters, franchises, or content library, which will keep the firm’s streaming services in high demand and give it a leg up in creating new movies and television shows.
• The decline in linear television will slow, so the value of the assets associated with it will start to shine. ESPN remains the premier brand in sports; putting it on a streaming service will open it up to a new set of consumers.
• The allure of Disney’s parks business is unmatched, and it will be a continuing profit engine.

Disney Bears Say

• Linear television will continue to decline. Even if successful, newer revenue sources like DTC streaming will never equal the profitability Disney once enjoyed.
• Disney now competes with tech companies for major sports rights, and they may have incentives to continue driving up prices. Sports remain material to Disney’s future, and being forced to pay up for critical content will depress profits.
• Too many streaming platforms now exist, and it’s questionable whether consumers will be willing to pay high prices or stick with individual services month in and month out.

This article was compiled by Aman Dagra.